©2014 Poultry Science Association, Inc.
Economic effects of proposed changes in living
conditions for laying hens under the
National Organic Program
Tomislav Vukina,*1 Kenneth Anderson,† and Mary K. Muth‡
*Department of Agricultural and Resource Economics, North Carolina State University,
Raleigh 27695-8109; †Prestage Department of Poultry Science, North Carolina State
University, Raleigh 27695; and ‡RTI International Research, Triangle Park, NC 27709
SUMMARY
In this paper, we estimate the costs and benefits of implementing the proposed National Organic Program for laying hens compared with alternatives. For the regulatory proposals under
option 2, the regulatory cost will be zero because most producers are already in compliance
with the proposed regulation. The anticipated benefits of this regulation will be zero as well,
because the current market prices already reflect consumers’ willingness to pay for the existing
animal welfare conditions. For the regulatory proposals under option 3, before market adjustments, the average regulatory burden for the entire organic egg industry will amount to $0.09
per dozen eggs, with extreme variations between $0 for small operations and $2.30 per dozen
for large operations. If we rely on the average price of organic eggs, $2.69 per dozen, and assume a maximum estimated benefit associated with improved animal welfare conditions, that
consumers would be willing to pay of about 30% above the current market price, the estimated
benefit of regulation amounts to $0.81 per dozen eggs. Based on the findings, we conclude that
option 2 is welfare neutral and could be easily adopted because it already has been adopted by
representative producers. For option 3, the benefit-cost ratio is larger than 1, which indicates
that the proposal passes the benefit-cost ratio test. The obtained result, however, has to be
interpreted with serious reservation because of the differential effect that the proposed regulation would have on different industry participants. Under option 3, the effect of the proposed
changes on small organic egg producers is negligible because most small producers are operating under conditions similar to the proposed living standards. However, costs will increase substantially for large organic egg producers and likely cause a substantial number of producers to
exit organic production and switch to conventional production, which would cause a substantial
decline in the prices of conventional eggs and organic feed in the short run.
Key words: organic, poultry, egg, living conditions, benefit-cost analysis
2014 J. Appl. Poult. Res. 23:80–93
http://dx.doi.org/10.3382/japr.2013-00834
DESCRIPTION OF PROBLEM
The USDA-Agriculture Marketing Service
(AMS) oversees the USDA National Organic
1
Corresponding author: [email protected]
Program (NOP). As part of the rulemaking process, AMS may conduct economic effect analyses of amendments to the national standards for
production and handling of organic agricultural
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Primary Audience: Researchers, Policy Analysts, Organic Producers
Vukina et al.: ORGANIC LAYERS’ LIVING CONDITIONS
Option 1 provides for no substantial changes
to existing regulations. Living conditions under
§205.239 do not specify indoor or outdoor stocking rates but require maintaining year-round living conditions that accommodate the health and
natural behavior of animals. All animals must
have year-round access to the outdoors, shade,
shelter exercise areas, fresh air, clean water, and
direct sunlight suitable to the species, stage of
life, and climate. Use of covered porches or runs
is acceptable and soil contact is not required.
Pullets may be confined until 20 wk of age if
necessary [per §205.239(b)].
Option 2 is similar to existing animal welfare
standards. In indoor housing, birds must be able
to move freely and engage in natural behaviors (turn around, flap wings, scratch, and dust
bathe). Scratch areas and dust baths must be provided. Houses with slatted floors must have a
minimum of 15% of available floor space as dust
bathing areas. For layers, perches are required
with a minimum of 15.3 cm (6 in.) per bird, rails
may be included in front of nest boxes, and the
floor may be slatted or mesh. Layers in singlelevel houses must have 1,394 cm2 (1.5 ft2), layers in raised roost-type houses must have 1,115
cm2 (1.2 ft2), and layers in multi-tier houses
must have 929 cm2 (1.0 ft2), provided that overhead perches and platforms provide for at least
55% of hens to perch. Natural light is required
such that reading is possible on a sunny day with
the lights turned off. With artificial lighting, a
dark period of at least 8 h must be provided each
day. Ventilation must be sufficient to ensure less
than 25 ppm ammonia.
Under option 2, exit doors must be distributed around the building and provide ready access to the outdoors such that more than 1 bird
can exit at a time. For layers, exit doors must
be at least 41 by 36 cm (16 in wide by 14 in
high). For outdoor access, pullets must be outside by 16 wk. Outdoor access must be available
when temperatures are over 50°F and provide
direct sunlight, although solid roofs are allowed.
The surface of the run can be concrete but must
have a well-maintained substrate of sawdust and
wood chips, and scratch areas and dust baths in
soil or suitable substrate must be available. Layers must have a minimum of 1,858 cm2 (2.0 ft2)
per bird for a minimum of 5% of the total flock
population. Mobile outdoor pen units must pro-
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products. With potential changes in the requirements for living conditions for organic poultry,
the NOP must consider the economic effects of
these changes on the regulated industry. The
USDA NOP regulations at 7 Code of Federal
Regulations Part 205 set forth the national standards for production and handling of organic agricultural products. The NOP regulations were
first published in 2000 and were updated in
February 2010 to include a substantial practice
standard amendment regarding access to pasture for livestock. Livestock living conditions as
they apply to poultry are regulated by §205.238
(Livestock Health Care Practice Standard) and
§205.239 (Livestock Living Conditions).
The NOP regulations do not set specific
stocking rates for either inside housing or outside access areas. The NOP issued a general policy memo in October 2002 affirming that outside
access areas are required, but it did not specify
size or other details. The NOP subsequently provided a memo regarding exemption to outside
access for purposes of biosecurity, as well as a
decision that outside access could be provided
in a fenced, roofed, and floored outside area (a
“porch or veranda” attached to a poultry house).
To obtain organic certification, poultry producers must submit to NOP an organic system plan
describing outside access. The organic system
plan is subsequently reviewed by USDA-accredited certification agents, who then interpret
the regulations, review the organic system plan
for sufficiency, and conduct on-site inspections
to verify compliance by organic operations.
The National Organic Standards Board
(NOSB), the NOP citizen advisory panel, made
recommendations in April 2002, November
2009, and December 2011 on animal welfare
issues concerning appropriate living conditions
for poultry. On December 2, 2011, based on the
NOSB recommendation and independent animal
welfare standards, NOP submitted 3 options for
regulations regarding outdoor access for poultry.
The specific regulatory options that were considered are (1) make no substantial changes to
the existing regulation, (2) adopt modified animal welfare standards similar to existing standards, and (3) adopt animal welfare standards
that differ substantially from existing standards.
The implementation period for options 2 and 3
is 5 yr.
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MATERIALS AND METHODS
The methodological approach frequently
used in economics to evaluate projects or policy
proposals is referred to as a benefit-cost analy-
sis. The approach relies on measuring benefits
and costs associated with the proposed project
or policy; if the benefits are larger than the costs,
or if the so-called benefit-cost ratio is greater
than 1, the project or policy passes the test and
is potentially approved.
Benefits of Regulation
Estimation of the monetary benefits of the
regulatory options in this study relies on the benefits transfer approach, which consists of a systematic review of the economics literature to determine if benefits estimates can be transferred
from other similar studies and adjusted to reflect
the regulatory proposals. The most important
part of the proposed regulations for living conditions for organic poultry relates to reducing
stocking densities, both indoors and outdoors;
thus, studies addressing this particular aspect of
animal welfare improvement are most relevant.
The economics literature shows that consumers
value improvements in animal welfare, and the
hypothetical willingness to pay for increased
animal space could be quite substantial.
Specifically for the organic egg industry
segment, the literature does not contain any
consumer preference studies of animal welfare
(living conditions) that are similar to the regulatory options. Therefore, we based our estimates on the assumption that benefits associated
with improved animal welfare are going to be
similar across poultry species, which allows us
to use broiler studies to make comparable estimates about organic eggs. As we found out via
industry interviews, the representative organic
egg producer already satisfies the regulatory requirements related to stocking rates proposed in
option 2. Therefore, consumers’ willingness to
pay for the reduction in animal density has been
already incorporated into the price of organic
eggs, so no additional benefits are associated
with option 2. For option 3, we concluded that
the benefits could be at most valued at a 30%
increase in willingness to pay over and above
the current market prices [2].
Cost of Regulation
We turn now to the methodology for estimating the increased costs associated with the
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vide a minimum of 1,858 cm2 (2 ft2) per bird
and be moved to provide vegetative cover at all
times.
Option 3 modifies the indoor living conditions (§205.239) under option 2 to provide more
indoor space, increases minimum requirements
for scratch areas and dust baths, increases the
exit door area, modifies outdoor living conditions to eliminate solid roofs, specifies stocking
rates, requires soil scratching areas, and requires
year-round vegetative cover. Under option 3,
stocking rates, which are calculated by the floor
perimeter of the building not including nest boxes or perch areas, must provide a minimum of
1,858 cm2 (2 ft2) per laying hen and 1.4 kg (3
lb) of live weight for pullets. For layers, perches
are required with 15.2 cm (6 in) per bird with at
least 35 cm (14 in) elevation. Pullets must have
perches at 4 wk of age. Scratch areas and dust
baths must be available for at least 30% of available floor space. Houses with slatted floors are
permitted if scratch areas are provided.
For option 3, exit doors must provide ready
access to the outdoors with a minimum of 1.8
m (6 ft) per 1,000 birds and a minimum height
of 35 cm (14 in). For the outdoor area, no solid
roofs are permitted except for shade structures, a
shaded area must be provided in warm weather,
and birds must have soil contact. In addition,
50% vegetative cover must be provided yearround. Layers must have a minimum of 1,858
cm2 (2 ft2) per bird.
The objective of this project was to provide
an independent economic effect analysis of proposed regulatory changes for the living conditions for organic poultry. In the current paper,
we estimate the costs and benefits of implementing the proposed rule for laying hens, compared
with alternatives (as per Executive Order 12866
[1]). The intention is for these results to help
guide the decisions of the NOSB when contemplating the adoption of any of the proposed regulatory proposals. Given other urgent priorities
at this time, NOP does not anticipate addressing
the NOSB proposals on animal welfare in the
near future.
Vukina et al.: ORGANIC LAYERS’ LIVING CONDITIONS
quiring prior approval from the Office of Management and Budget. Under the Paperwork Reduction Act, Office of Management and Budget
approval is required before collecting data from
more than 9 entities under government-sponsored studies [6].
Baseline Cost Estimation
The baseline cost estimates presented in this
section reflect stylized approximations of highly
idiosyncratic individual real-life cases and are
not intended to be used to assess an individual
producer’s profitability or cash flow. The baseline scenarios reflect the average situations for
the most frequently observed configurations of
production space. In presenting the budgets,
we focus primarily on the cost aspects, because
these are most relevant in analyzing the economic effects of various regulatory scenarios.
The hypothetical values for total revenue are
calculated based on the break-even price, which
implicitly assumes the zero-profit condition.
The basic assumptions employed throughout
can be summarized as
• simple linear (straight-line) depreciation
of assets with zero salvage value;
• annual opportunity cost of capital of 3%;
• homogenous labor hired at $13.25 per h;
• property tax rate of 0.8% of the value of
the assets;
• annual insurance costs of 0.5% of the value of the assets; and
• price variability for inputs according to
the size of the flock.
In addition to the above assumptions, land
prices were constructed based on average real
estate values for farm land per acre in 2011 [7].
Land prices were calculated as the average of
the published land prices in the top organic-eggproducing states. Prices for land in New York,
Massachusetts, Michigan, North Carolina, and
California were averaged to obtain a land price
of $5,675 per acre. The annual rental rate was
obtained by multiplying the value of land with
the 3% interest rate, resulting in annual rates of
$170 per acre.
Labor costs were estimated using data obtained on hourly wages for farming, fishing,
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proposed regulations. The employed methodology relies on the standard enterprise budgeting
techniques [3]. In constructing the budgets, we
focused primarily on the cost aspects, because
these are most relevant in analyzing the economic effects of various regulatory scenarios.
The imputed values for total revenue were calculated based on the break-even price, which
implicitly assumes the zero-profit condition [4].
The cost estimation methodology involved 2
steps. In the first step, we established the baseline cost structure and the break-even price. In
the second step, we analyzed whether any of
the specific regulatory requirements in options
2 and 3 will have an effect on the established
baseline cost structure. All regulatory proposal
items that could have an effect on the representative operation’s baseline costs were quantified
to obtain the new (postregulation) cost structure
and the new break-even price. The comparison
of the new (postregulation) and old (baseline)
break-even prices is finally expressed as a percentage increase in the break-even price relative
to the baseline and represents the cost increase
due to regulation.
We simplified the analysis by developing a
set of representative operations defined by the
size of organic egg operations. Development of
representative operations is a method frequently
used in conducting economic effect analyses because it facilitates estimation of industry costs
with relatively limited data. This method avoids
the need to develop a specific cost estimate for
each potentially affected entity, which would be
a time-intensive and costly process and likely
require an extensive industry survey beyond the
scope of this project. For the purposes of studying the effects of proposed regulations on the
cost of producing organic eggs, we focused our
analysis on 3 sizes of organic layer operations:
small, midsize, and large flocks.
In line with this approach, we developed
structured interview guides [5], where the first
group of questions was set up to uncover the basic cost structure of the enterprise and the second group of questions focused on the typical
costs involved in complying with the proposed
regulations. When conducting industry interviews, we employed a method consistent with
the limitations on the number of establishments
that may be contacted (fewer than 9) without re-
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84
Regulatory Cost Estimation
Using the baseline enterprise budgets developed in the first step of the cost estimation
methodological approach, in the second step,
we analyzed the effect of the regulation on the
baseline cost structure. We present the estimated
costs of compliance for each regulatory option
separately. In each case, we present costs for
representative farms of different sizes. In some
cases, the representative organic producers are
in compliance with the regulatory options; thus,
no incremental costs exist due to the proposed
regulation. In other cases, the effect of the regulation on costs can be substantial.
Sizes of Organic Egg Operations
One of the important difficulties encountered
in this study is the lack of precise data on the
distribution of producers by farm size. Having
this information is very important because the
regulatory proposals we analyzed clearly have
significantly different effects on producers depending on their size. Consequently, the com-
bined effect of the proposed regulations on the
organic egg industry as a whole will depend on
the market shares that different size producers
have in the total national production.
To solve this problem, we relied on the data
on the number of certified organic egg producers
and operations in 2011 obtained by the USDAAMS survey of 36 USDA-accredited state and
private organic certifiers (for details see [5]).
Corresponding to our baseline enterprise budget scenarios, we divided the egg industry into
3 segments: small (fewer than 16,000 layers),
midsize (between 16,000 and 100,000 layers),
and large producers (more than 100,000 layers).
To obtain the distribution by the defined size
categories, we calculated the average producer’s
size for each certifying agency by dividing the
number of birds by the number of producers that
each individual certifying agency certified in
2011. Next, we calculated the percentage share
of each certifying agency in the industry total
(for each of the poultry industries separately),
and we multiplied this percentage share with the
average producer size for this certifying agency. Finally, we summed these numbers in each
of the individual size categories to obtain the
percentage shares of each size category in the
industry total. As shown in Table 1, 30% of production is produced by small producers, 54% by
midsize producers, and 16% by large producers.
Likewise, we summed the number of producers
in each size category based on the average producer size of the certifying agency. The results
show that 74% of producers are estimated to be
small, 25% are estimated to be midsize, and 1%
are estimated to be large.
Given the lack of better data, this approach
only depends on an assumption that the distribution of producers by size within one certifying agency is not too wide such that the mean
size is a good representation of the observed
size. Practically, this means that a typical certifier does not certify very small and very large
producers at the same time. To the extent that
some specialization of certifying agencies exists, such that, for any particular commodity,
some of them specialize in certifying small producers and others specialize in certifying large
producers, the obtained size distribution should
be fairly reliable.
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and forestry occupations published by the Bureau of Labor Statistics for states with high
concentrations of organic egg production. We
calculated an average hourly wage rate using
wage rates from 8 states—California, Iowa,
Massachusetts, Michigan, New York, North
Carolina, Oregon, and Pennsylvania—resulting in an average hourly wage rate of $13.25.
Organic certification costs were calculated as
the average of California Certified Organic
Farmers and Iowa Organic Certification Program posted fees for each organic production
sales range category.
All budgets were prepared based on the existing literature [3, 8–19], personal communications with extensions specialists and industry
leaders, and the authors’ expert opinions and
insights based on their research on the poultry
industry [20]. The budgeting analyses show
that the baseline break-even organic price for
a representative small organic layer operation
is $3.944 per dozen eggs, for a midsize organic
layer operation it is $2.475, and for a large organic operation it is $2.396.
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Vukina et al.: ORGANIC LAYERS’ LIVING CONDITIONS
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Table 1. Estimated number of Certified Organic Poultry and Egg Producers and Operations by size in 20111
Stock or species
Layer hens (inventory)
Small (1,000 to 16,000 hens)
Midsize (16,000 to 100,000 hens)
Large (more than 100,000 hens)
Number
of birds
Estimated
percentage
of production
Estimated
number
of producers2
Percentage
of producers
7,673,085
2,301,925
4,143,466
1,227,694
100
30
54
16
580
430
145
5
100
74
25
1
1
Based on information collected by USDA-Agricultural Marketing Service [21].
The number of producers for each size category is estimated by assigning all producers of each certifying agency to a size
category based on the average production of operations under the certifying agency.
2
The analysis of the proposed rules on the cost
of production of organic eggs starts with the production of layer pullets as the first stage in the
egg production cycle. Small pullet operations
will typically not be affected by the proposed
regulations in either regulatory scenario. In contrast, large pullet producers will be affected in
both regulatory scenarios related to the outdoor
access after 16 wk of age. To mitigate the effect of these proposed rules, the pullet growers
indicated in interviews that they would shift the
growing cycle so that the pullets would be moved
into the laying facility by wk 16. Subsequently,
this would shift the costs of raising the pullets
from 16 to 18 wk, where there is no egg production to the egg producer. This would result in
the suppression of feed conversion as well as the
increase in some utility costs during those 2 wk.
However, the price of pullets, if transferred 2
wk earlier, will have to drop, thereby offsetting
an increase in cost incurred by layer operations.
Therefore, the net effect of regulation on organic
egg production through the pullets segment of
the market is likely to be zero.
Next, we turn to eggs. Based on our information gathering, the representative typical organic
egg producers, regardless of size, currently operate under the requirements proposed under
option 2; hence, the effect of proposed regulation on the break-even price is zero. In contrast,
the regulatory proposal summarized in option 3
will have multiple effects on the cost structure of
representative midsize- and large-scale organic
egg producers through
• a one-time (fixed) cost associated with
retrofitting the house to install more exit
holes, and
• an increased requirement for more outdoor access, which will be reflected in
fencing costs and the increased cost of
land; increased mortality and reduced feed
conversion associated with a substantially
increased outdoor area; and additional
heating costs to maintain the indoor environment within the thermal neutral zone
of the chickens.
However, when it comes to large producers,
the most significant effect of option 3 will be reflected in the requirement to significantly reduce
the population density on the established farms
in response to the proposed regulation regarding
the indoor density, with an enormous effect on
the revenue reduction that could cause some of
the large producers to exit the organic industry
and convert their operations into conventional
egg production. The combined effect of the proposed regulation in option 3 is estimated to be a
6.8% increase in the break-even price for midsize producers and a 96% increase in the breakeven price relative to the baseline cost scenario
for large producers. We describe the derivation
of these estimates in subsequent sections.
Small Operations (Fewer than 16,000 Hens)
The summary of the regulatory effects of different regulatory options vis-à-vis the baseline
for small egg producers is represented in Table 2
[22]. As far as indoor housing requirements are
concerned, a typical small organic egg producer
should automatically satisfy all of the regulatory
option 2 requirements. The same is true for the
outdoor access requirement. As a result, the percentage increase in the break-even organic price
relative to the baseline is 0%. Similar to option
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RESULTS AND DISCUSSION
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86
Table 2. Estimated costs of producing organic eggs under different scenarios for small operations in 2011
Item
Option 2
Option 3
1,000
17,904
3,160
1,000
17,904
3,160
1,000
17,904
3,160
28,892
4,113
68,830
72,944
2,338
28,892
4,113
68,830
72,944
2,338
28,892
4,113
68,830
72,944
2,338
70.61
3.94
—
70.61
3.94
0.0
70.61
3.94
0.0
1
Breaker market egg price assumes $0.74 per dozen.
2, when indoor housing requirements are concerned, the typical small organic egg producer
should satisfy all of the regulatory option 3 requirements as well. In addition, small producers
typically already provide outdoor access, which
would meet option 3 conditions. Hence, the percentage increase in the break-even organic price
relative to the baseline is also 0%.
Midsize Operations
(Between 16,000 and 100,000 Hens)
To satisfy the organic certification requirements, most typical midsize producers are already operating under the indoor stocking rates
required by option 2 and, in some cases, are
exceeding these stocking rates. Currently, they
are operating using a combination of natural and
artificial lighting to achieve the 16 h of daylight
for optimal performance in the older single-level
houses. Outdoor access requirements under option 2 are also being met. A typical organic egg
producer is providing access at 2 ft2 per hen
based on approximately 10% of the hens using the verandas. Some producers have allowed
for the outdoor space at the 2 ft2 for 33% of the
flock. As the result, the percentage increase in
the break-even organic price relative to the baseline is 0%.
To satisfy option 3 organic certification requirements, most of these companies would
have to alter their indoor stocking rates. This
would require a reduction in flock size to meet
the indoor stocking rate depending on the hous-
ing type and equipment configuration. For a single-level house, the reduction in the flock size
would be 12.5%. The reduction in flock size
would cause a heat loss inside the building that
will need to be replaced by an additional heating
requirement in winter months (120 d) in colder
climates. Assuming laying hens generate heat of
40 BTU per hen per hour [12] and 91,600 BTU
per gallon of propane, valued at a price of $1.51
per gallon, the heat replacement cost amounts
to $3,798 annually. In addition to the reduction
in flock size, some modifications to the housing structures will be required. In particular,
the number and size of exit doors are typically
inadequate. Our estimates are based on the installation of 14 exit doors at a one-time expense
of $400 per door. On an annual basis, this cost
translates into a $644 increment plus the corresponding increases in insurance and property
taxes.
In our interviews with producers, we found
out that midsize organic egg producers would be
able to expand outdoor access to meet option 3
requirements of 1,858 cm2 (2 ft2) per hen housed.
However, this would come at a cost of adding
approximately 1 acre of land with its rental rate
of $170 per year. The cost of additional fencing
is assumed trivial and is not explicitly accounted
for. Even though the hens would consume some
nutrients on a more extensive system, typically
what is seen is an increased feed consumption
from 1.7 kg (3.8 lb) per dozen to 1.8 kg (4.0 lb)
per dozen, or higher, due to the repartitioning of
the nutrients consumed to support the foraging
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Production volume
Birds per operation (n)
Organic eggs (dozen)
Breaker market eggs (dozen)
Costs per farm ($)
Total fixed costs
Annualized fixed costs
Variable costs
Total annual costs
Breaker market eggs revenue adjustment1
Costs per dozen eggs
Break-even revenue per bird ($)
Break-even price per dozen organic eggs ($)
Percentage increase over baseline
Baseline
Vukina et al.: ORGANIC LAYERS’ LIVING CONDITIONS
87
Table 3. Estimated costs of producing organic eggs under different scenarios for midsize operations in 2011
Item
Option 2
Option 3
16,000
314,899
78,725
16,000
314,899
78,725
14,000
261,595
65,399
518,225
58,210
779,345
837,555
58,256
518,225
58,210
779,345
837,555
58,256
523,900
58,454
680,717
739,172
48,395
48.71
2.47
—
48.71
2.47
0.0
49.34
2.64
6.7
1
Breaker market egg price assumes $0.74 per dozen.
activity and the increased movement to reach
resources. With current feed costs, this would
mean an added increase in per-dozen egg costs.
Finally, larger outdoor access is likely to cause
mortality to increase from 8.3 to 18% [15]. The
effect on reduced egg production was calculated under the assumption that mortality will be
evenly distributed throughout the entire production cycle. Taking all these effects jointly into
consideration, we find the projected increase in
the break-even organic eggs price amounts to
6.7%.
The summary of the estimated costs of regulation and their relationship to the baseline cost
scenario is presented in Table 3. As mentioned
before, the typical midsize organic egg producer
appears to be automatically in compliance with
the regulatory proposal contained in option 2;
hence, the increase in the average total cost, and
thus the break-even price relative to the baseline, amounts to 0%. A negligible effect on midsize producers is definitely associated with the
types of production operations they are integrating into organic egg production. These are typically modified older facilities previously used
for broiler breeder fertile egg production, which
is typically smaller in size and has a single production unit on a farm. This allows for greater
flexibility associated with indoor hen density
and outdoor access. If they were to build new
facilities, the effect of the new regulations, even
under option 2, would be greater and may be
comparable to the effects on large producers.
Several interesting results are worth highlighting with respect to the new cost structure
under regulatory option 3. First, the new indoor
stocking rate requirement will force producers to
reduce the number of hens, which will, in turn,
reduce some of the variable cost components
(e.g., feed) and increase others (e.g., energy).
Second, because of required investments in land
and equipment, the annualized fixed costs go up,
but only moderately. Finally, the reduction in the
number of birds placed reduces the quantity of
eggs produced with the negative effect on both
the average cost per dozen eggs and on the total revenue. All effects combined result in a required increase in price necessary to break even.
Large Operations (More than 100,000 Hens)
As it relates to option 2, the interviews with
industry participants revealed that large producers are already operating under the required
indoor stocking rates. Their production facilities are operated using predominantly artificial
lighting; natural sunlight is provided by outdoor access. Outdoor access requirements under option 2 are also being met; large organic
egg producers are providing outdoor access using verandas at 2 ft2 per hen based on the flock
utilization ranging from 10 to 33%. Most of the
veranda areas are wire pens with covers to prevent wild birds and predators from having direct
contact with the flock. This does not prevent indirect contact from occurring nor small rodents
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Production volume
Birds per operation (n)
Organic eggs (dozen)
Breaker market eggs (dozen)
Costs per farm ($)
Total fixed costs
Annualized fixed costs
Variable costs
Total annual costs
Breaker market eggs revenue adjustment1
Costs per dozen eggs
Break-even revenue per bird ($)
Break-even price per dozen organic eggs ($)
Percentage increase over baseline
Baseline
88
to 1.8 kg (3.8 to 4.0 lbs) per dozen eggs. According to our estimates, all these effects combined
produce a stark increase in the break-even price
of 96%.
The summary of the estimated costs of regulation and their relationship to the baseline cost
scenario for the representative large organic
eggs producer is presented in Table 4. As seen
from the table, the typical large organic eggs
producer is automatically in compliance with
the regulatory proposal contained in option 2;
hence, the increase in the average total cost, and
thus the break-even price relative to the baseline, amounts to 0%. However, this is most definitely not the case for option 3. The reduction in
the number of birds and, consequently, the reduction in the number of eggs and total revenue
are staggering.
At this point, it is important to emphasize
that the time horizon of 5 yr that we implicitly
used in this analysis eliminates the need to consider the possibility of constructing an entirely
new production complex that would satisfy the
stringent stocking rates requirement envisioned
in option 3. Moreover, based on our interviews
with producers, they unanimously ruled out the
possibility of investing in the construction of
new houses, even in the long run, and claimed
that they would exit the organic industry instead.
A few other points are worth clarifying. First, a
small reduction in annualized fixed costs exists
due to the reduction in annual organic certification fees resulting from the reduction in revenue.
Second, a dramatic reduction in total variable
cost was noted due to the reduction in the volume of output. This reduction in total variable
cost is somewhat dampened by the need to use
more energy to offset the heat loss inside the
building resulting from lower population density, the phenomenon that was well explained
in the section regarding midsize producers. All
these effects combined produce a dramatic increase in break-even price of 96% over the baseline.
Estimated Total Industry Costs
Using the per-farm estimated regulatory
costs above and the estimates of production volumes and actual prices, we calculated the total
estimated industry costs due to regulation under
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from entering the verandas. The construction of
verandas ranges from concrete covered in a litter
to soil with no vegetation. From the perspective
of a typical large organic egg producer, compliance with the proposed option 2 requirements
will have no appreciable additional costs; hence,
the percentage increase in the break-even organic price relative to the baseline is 0%.
For option 3, the most significant effect of the
proposed regulation will be felt by large-scale
egg producers. Based on our analyses, the representative large-scale egg producer could satisfy
the proposed requirements only through a rather
dramatic increase in costs. The typical production system is some type of multi-level housing,
either an aviary or an integrated multi-level slat
system. In addition, many of the large producers have integrated their production into complexes that contain multiple houses along with
feed milling and waste disposal facilities. Their
ability to provide increased indoor and outdoor
space, for which they are approved under the
current standards, is limited. The limiting space
requirements are related to both indoor and outdoor stocking rates. Even after a dramatic reduction in indoor population density, the outdoor
space requirement under option 3 still remains a
binding constraint. In the example provided by
our baseline scenario, the indoor stocking rate
of 2 ft2 per hen, calculated by floor perimeter
of the building, would require a reduction in the
number of hens from 100,000 to 13,500 hens
because the typical house (60 × 450 ft) has the
floor surface of 27,000 ft2. This dramatic reduction in flock size has consequences over the entire cost structure. A particularly important cost
item becomes the cost of providing additional
heat in a significantly depopulated house. After
this 86.5% reduction in flock size, it is interesting to note that the outdoor space requirement of
1,858 cm2 (2 ft2) per bird proposed by option 3 is
still not met. To satisfy this requirement, outdoor
space has to be increased from the current 1,855
m2 [20,000 ft2; 1,858 cm2 (2 ft2)/bird for 10% of
100,000 birds] to 2,505 m2 (27,000 ft2). From
our interviews, this 35% increment in outdoor
space could be accommodated by most large
producers at the proportionate 35% increase in
the annual veranda-related cost. The only other
cost related to increased outdoor access is reflected in the reduced feed conversion from 1.7
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Vukina et al.: ORGANIC LAYERS’ LIVING CONDITIONS
89
Table 4. Estimated costs of producing organic eggs under different scenarios for large operations in 2011
Item
Option 2
Option 3
100,000
1,968,120
492,030
100,000
1,968,120
492,030
13,500
265,696
66,424
3,986,200
418,234
4,661,742
5,079,975
364,102
3,986,200
418,234
4,661,742
5,079,975
364,102
3,986,200
414,184
882,758
1,296,943
49,154
47.16
2.40
—
47.16
2.40
0.0
92.43
4.70
96.0
1
Breaker market egg price assumes $0.74 per dozen.
each of the regulatory options and contrasted
these numbers with the industry total revenue.
Under some scenarios, the estimated total industry costs are zero because the representative operations are in compliance with the regulation.
Table 5 shows that the estimated total organic
eggs industry costs due to the proposed regulation under option 2 are $0. Table 6 presents the
estimated total industry costs under option 3, for
which the total annual regulatory costs are estimated to be $68.1 million. These estimates represent 17% of estimated total industry revenue.
All baseline and cost-shifting scenarios are
based on the assumption of a representative producer. To the extent that the entire egg industry is
fairly homogenous with respect to its cost structure within each size category, the representative
agent approach is adequate. However, if the industry is technologically highly heterogeneous,
then the representative agent approach is not going to capture all specific nuances and idiosyncrasies of different production processes, and a
complete industry survey would be required.
All cost-shift scenarios are based on the
intermediate length of the run (5-yr horizon),
where changes in variable cost through input
and output adjustments are possible together
with some changes in fixed cost through smaller
adjustments in land, buildings, and equipment.
However, potential entry and exit of firms, as
well as the new construction of large-scale production facilities by existing firms as the result
of regulation, is not considered in the current
analysis.
In light of this information, the proposed
regulation regarding indoor and outdoor stocking rates was analyzed by first adjusting the indoor stocking rates by reducing the number of
animals until the condition is satisfied. In other
words, we ignored an unlikely possibility that
a producer would opt to construct a brand new
housing facility to satisfy the indoor stocking
rate constraint to keep the production at the
original preregulation level. If and when, after
this adjustment took place, the new proposed
outdoor stocking rate is still binding, the producer was allowed to purchase additional land
at the prevailing market land prices. In some
cases, the stocking rate regulation requirements
are so severe, based on the interview responses,
we found out that the reduction in revenue associated with the required reduction in the number
of animals and the corresponding increase in average total cost would force some firms to exit.
Regulatory Feasibility of Organic Egg
Production Under Option 3
In conducting data collection and analyses for the regulatory options, we identified
several concerns regarding the feasibility of
complying with the requirements under option
3 for egg production. The interviews with organic egg industry participants and other experts revealed important reservations about the
proposed regulations as presented in the option
3 scenario.
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Production volume
Birds per operation (n)
Organic eggs (dozen)
Breaker market eggs (dozen)
Costs per farm ($)
Total fixed costs
Annualized fixed costs
Variable costs
Total annual costs
Breaker market eggs revenue adjustment1
Costs per dozen eggs
Break-even revenue per bird ($)
Break-even price per dozen organic eggs ($)
Percentage increase over baseline
Baseline
100
30
54
16
148,858,000
44,657,000
80,383,000
23,817,000
Baseline
number
of units1
Dozen eggs
Dozen eggs
Dozen eggs
Dozen eggs
Unit
400,366,000
120,110,000
216,197,000
64,058,000
Total industry
revenue
in 20112 ($)
Total industry
cost ($)
0
0
0
0
Regulatory
cost per unit ($)
0.00
0.00
0.00
0.00
100
30
54
16
148,858,000
44,657,000
80,383,000
23,817,000
Baseline
number
of units1
Dozen eggs
Dozen eggs
Dozen eggs
Dozen eggs
Unit
400,366,000
120,110,000
216,197,000
64,058,000
Total industry
revenue
in 20112 ($)
Total industry
cost ($)
68,118,000
0
13,334
54,784
Regulatory
cost per unit ($)
0.09
0.00
0.17
2.30
2
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Total estimated dozens of organic eggs are based on laying hen counts published by USDA-National Agricultural Statistics Service [23, 24] assuming 19.4 dozens of eggs per laying hen.
Revenue derived from production estimates obtained by USDA-Agricultural Marketing Service [21] and prices based on simple averages of monthly prices provided by Lawrence Haller, Chief
Economist, USDA-Agricultural Marketing Service, Poultry Programs.
1
Total organic egg production
Eggs, small operations
Eggs, midsize operations
Eggs, large operations
Item
% of
Production
Table 6. Total estimated annual industry costs of regulations under option 3
Total estimated dozens of organic eggs are based on laying hen counts published by USDA-National Agricultural Statistics Service [23, 24] assuming 19.4 dozens of eggs per laying hen. Note
that there is a small difference between this assumption and the assumption of 308 eggs per hen that we use in our midsize and large producers’ budgets with 20% loss to the breaker market
(20.5 dozens of organic eggs per hen) and 284 eggs per hen with 15% loss to the breaker market in small producer budget (21.1 dozens per hen).
2
Revenue derived from production estimates obtained by USDA-Agricultural Marketing Service [21] and prices based on simple averages of monthly prices provided by Lawrence Haller, Chief
Economist, USDA-Agricultural Marketing Service, Poultry Programs.
1
Total organic egg production
Eggs, small operations
Eggs, midsize operations
Eggs, large operations
Item
% of
Production
Table 5. Total estimated annual industry costs of regulations under option 2
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Vukina et al.: ORGANIC LAYERS’ LIVING CONDITIONS
of midsize and large producers to restrict
the access of wild animals and rodents to
the flock of laying hens and, ultimately,
increases access to the poultry by wild
birds and aerial predators. Under the proposed extensive outdoor access systems,
it would be impossible for the producers
to meet the intent of the Food and Drug
Administration Egg Safety Plan.
• Most of the large producers indicated that
the option 3 regulatory levels for both
indoor and outdoor space would induce
them to exit the organic industry and
convert their operations to conventional
production practices. In the interviews,
they indicated that because of the capital
investment in their operations they would
not be able to produce organic eggs.
• Within the Clean Water Act [25, 26], operations that confine poultry to a specific
paddock for more than 45 d out of 12 mo
are defined as animal feeding operations.
Many of the midsize organic producers fall into the medium contained area
feeding operation (CAFO) definition. As
with all free-range poultry operations, a
significant portion of the paddock is bare
soil throughout the year regardless of the
season. In our interviews with producers,
we learned that several producers with
operations in sensitive watersheds have
been informed [27, 28] that they would be
prohibited from providing free-range access to their laying flocks without adding
600 acres to their operation, constituting
a $3.4 million investment in land that is
not available in their area. They indicated
that they would have to close their operations and move to another location to
continue production. The current CAFO
Rule [25] prohibits the discharge of fecal
coliforms from manure into surface waters from CAFO. All of the producers in
this case indicated they would be forced
to abandon organic production because
of the inability to acquire land, or they
would have to construct a new facility to
accommodate potential changes in current
and future regulations. In the future, the
US Environmental Protection Agency is
examining the regulations pertaining to all
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• The number and size of exit doors required
per 1,000 hens appears to be excessive because their installation could sometimes
jeopardize the physical integrity of the
housing structure, rendering it unusable
for continued production. The number of
exit doors added depends on the ultimate
determination of indoor stocking rates.
The proposed regulation for increased outdoor space was indicated as excessive by
all producers interviewed. The numbers of
layers that actually go outside decreases
as the flock size increases. Typically, most
of the midsize and large producers indicated that less than 10% of the flock was
outdoors at any point in time. Granted that
these are anecdotal observations, they are
consistent across regions and producer
sizes. Also chickens are prey animals and
are unlikely to venture very far away from
the chicken house; hence, significant areas
of added space could be left unused. If a
requirement for 50% forage cover is added, the costs for paddock expansion would
need to more than double to provide sufficient space. None of the mid- to large-size
producers indicated that they would be
capable of maintaining this type of forage
cover within the outdoor access areas.
• Organic producers that have more than
50,000 hens are currently subject to the
Food and Drug Administration’s Egg
Safety Plan, and, as of July 9, 2012, producers having 3,000 to 49,999 hens were
under the same regulation. Regulation 21
CFR Part 118.4(b) [4] states that, as part
of an effective biosecurity program, producers must “prevent stray poultry, wild
birds, cats, and other animals from entering poultry houses”; based on the interpretation of the rule and the need for a
rodent and pest control program [21 CFR
Part 118.4(c)], a prevention program must
be instituted to limit rodents in the building as well. Currently, large producers use
verandas and covered porches, which in
essence does limit other animals’ access
to poultry facilities. Introduction of rules
that mandate greater outdoor access areas
eliminates the use of covered verandas
and porches. This eliminates the ability
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92
of the sensitive watersheds and is looking
into establishing new runoff rules for the
Mississippi watershed, which will affect
some of the larger organic operations in
the United States.
CONCLUSIONS AND APPLICATIONS
REFERENCES AND NOTES
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2. See detailed list of literature references that leads to
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2012).
3. Boehlje, M., and V. Eidman, ed. 1984. Farm Management. Wiley, New York, NY.
4. The break-even price represents the sale price that the
producer must charge for a product in order for the revenues
to just cover the expenses.
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AMSv1.0/getfile?dDocName=STELPRDC5103929.
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1. For the regulatory proposals under option 2, we found that the regulatory cost
will be zero because most of the producers are already in compliance with the
proposed regulation. We also found that
the anticipated benefits of this regulation are going to be zero as well because
the current market prices already reflect
consumers’ willingness to pay for the existing animal welfare conditions.
2. For the regulatory proposals under option 3, we found that, before market adjustments, the average regulatory burden
for the entire organic egg industry will
amount to $0.09 per dozen eggs, with
extreme variations between $0 for small
operations and $2.30 per dozen for large
operations. If we take the average price
of organic eggs, $2.69 per dozen, and assume the maximum estimated benefits
associated with improved animal welfare conditions, that consumers would
be willing to pay of about 30% above the
current market price, we end up with an
estimated benefit of regulation of about
$0.81 per dozen eggs.
3. Based on our findings, we conclude that
option 2 is welfare neutral and could be
adopted because it has already been adopted by representative producers. As
for option 3, we found that, on average,
the benefit-cost ratio is larger than 1,
which indicates that the proposal would
pass the benefit-cost ratio test.
4. However, that option 3 passed the benefit-cost ratio test has to be interpreted
with serious reservation because of the
differential effect that the proposed regulation would have on different industry
participants. Under option 3, the effect
of the proposed changes on small organic egg producers is negligible because
most small producers are operating under conditions similar to the proposed
living standards.
5. However, under option 3, costs will increase substantially for large organic egg
producers and likely cause a substantial number of producers to exit organic
production and switch to conventional
production. The switch from organic to
conventional production for large organic egg producers could substantially disturb the conventional egg market causing substantial price declines, at least in
the short term. This change would also
affect markets for organic corn and soybeans used as feed and cause a substantial decline in the prices of organic feed.
Vukina et al.: ORGANIC LAYERS’ LIVING CONDITIONS
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in Economic Impact Analysis of Proposed Regulations for
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gov/portal/py.
22.The detailed estimates for the regulatory impacts of
options 2 and 3 for each of the size categories are available
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23.
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Acknowledgments
This study was funded by the USDA-Agricultural
Marketing Service (Washington, DC), Contract AG6395-P-11-0638. All opinions stated are those of the authors
and not of the USDA.
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